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THERE have been periods during the boom when house prices have fallen before; it happened in 2000 when they fell for four consecutive months. But this was a drop in the ocean compared with the great crash of a decade or so ago. Between the 1989 peak and the trough more than four years later, prices fell 15%-20% in cash terms and between 30% and 40% in real terms. Another drop of such proportions is the nightmare scenario.

For Gordon Brown, who conceded in the House of Commons last week that “an adjustment in house prices is taking place”, a property collapse in the run-up to the election would be a disaster. He and Tony Blair, having insisted that they had put an end to “Tory boom and bust”, would be left with politically-damaging egg on their faces.

But the Bank would also suffer. Last week the House of Lords economic affairs committee criticised it for consistently over-predicting inflation and thus keeping interest rates higher than necessary.

King’s comments last week on house prices, like his earlier remarks in the summer when he warned buyers not to ignore the risks of a house-price crash, will also be blamed if prices now fall sharply. Some in the market believe he should have kept his views to himself.

“I am as convinced as I was after the governor’s intervention in the summer that these things are self-fulfilling,” said Henry Pryor, who runs Charles Lister, a chain of estate agents. “I wish he would keep his nose out of it. It comes as news to me that house prices are part of his responsibility. This is not something that his predecessor did.”

Pryor believes that King’s remarks will guarantee a weak period for the housing market, but he remains upbeat about the prospects. “In 12 months prices will be higher than now,” he said.

THAT is now the big debate. Crash or just a slowdown? Collapse or soft landing? For some housing-market economists there is only one possibility.

“A modest fall doesn’t get you far enough to bring valuations back into line, particularly for first-time buyers,” said Ed Stansfield, property economist at Capital Economics, who predicts a 20% drop in prices, similar to the last crash.

“People are no longer worried about getting in before prices rise, but are concerned about over-paying for property. They are now going to be thinking: ‘If I can wait for a few months and get £5,000 or £6,000 off the price, I’ll wait.’”

The crash, he said, will not be brought about by the market being deserted by buy-to-let investors but by homebuyers waiting for prices to drop.

Capital Economics is not alone in predicting a crash. The International Monetary Fund warned that this is one of the key risks facing Britain’s economy.

John Calverley, chief economist at American Express, and author of Bubbles and How to Survive Them, said: “The house price-earnings ratio is way too high. If the economy does okay over the next 12 months we probably won’t see a 30% drop in house prices. The danger comes when we have a downturn and over, say, a four-year period there is a high probability of that happening and really pushing down prices.”

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